Introduction to Financial Management

Dr. Marc Faber concluded his monthly bulletin (June 2008) with the Following….

Dr. Marc Faber, greatest financial guru of America

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Introduction to Introduction to financial management financial management

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What Is Business What Is Business Finance?Finance?

Imagine you were to start your own business.

you would have to answer the following three questions.

1.What long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need?

2.Where will you get the long-term financing to pay for your investment?

3.How will you manage your everyday financial activities such as collecting from customers and paying suppliers? 3

These are not the only questions, but These are not the only questions, but they are among the most important. they are among the most important. Business finance,Business finance,broadly speaking, is the study of ways broadly speaking, is the study of ways to answer these three questions. We’ll to answer these three questions. We’ll be looking atbe looking ateach of them in the chapters ahead.each of them in the chapters ahead.

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Classifications of financial

Public finance private finance 1.Government institutions 1. Business finance 2. central government 2. personal finance 3. state government 3.Finance of Non-profit 4. local self government organization

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DefinitionsDefinitions

Finance managementJ.F. Bradlery :-“financial

management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals”

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DefinitionDefinition

Business financeGuthmann and dougall:-”

business finance can be broadly defined as the activity concerned with the planning, raising, controlling and administering the funds used in the business”.

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Meaning of financial Meaning of financial managementmanagement

Financial management is application of principles of management to the subject called finance , it involves planning, controlling decision making with respect to finance activity of the business.

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The Four Basic Areas of The Four Basic Areas of financefinance•Corporate finance•Investments•Financial institutions•International finance

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Why Study Finance?Why Study Finance?

Marketing and financeBudgets, marketing research, marketing financial products

Accounting and financeDual accounting and finance function, preparation of financial statements

Management and financeStrategic thinking, job performance and profitability

you and finance(personal finance)Budgeting, retirement planning, college planning, day-to-day cash flow issues 10

The Evolution of Financial Management

Early 1900 : instrument, institution, and procedures of capital market and money market

Around 1920 : focus on security and banking sector, and investment in common stock

Around 1930 : focus on liquidity, debt, regulation, bankruptcy, reorganization

End of 1950 : capital budgeting, valuation, and dividend policy

Around 1960 : development of portfolio theory Around 1970 : CAPM model and APT model

that can be used to value the financial assets Around 1990 : multinational financial

management, behavioral finance, enterprise risk management, good corporate governance

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Financial ManagerFinancial Manager

Financial managers is responsible for managing all the financial obligations of the firm.

The top financial manager within a firm is usually the Chief Financial Officer (CFO)◦Treasurer – oversees cash management, credit management, capital expenditures and financial planning

◦Controller – oversees taxes, cost accounting, financial accounting and data processing

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Organization structure Organization structure of finance of finance

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Nature of financial Nature of financial managementmanagement

FM is an area of decision making in finance function of the business.

It is descriptive/ theoretical/ statistical/ historical and analytical in nature.

It involves application of management principles to the finance function.

It is applicable to every organization irrespective of its size, nature, place.

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Continued…Continued…It deals with accumulation and

utilization of financial resources(business resources).

It is directed towards achieving business objectives.

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Scope of financial Scope of financial management.management.

1.Estimating financial requirements2.Deciding capital structure3.Selecting source of finance4.Selecting pattern of investment5.Cash management6.Profit management7.Ensuring liquidity8. Meeting statuary requirement.

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Financial Management Financial Management DecisionsDecisions

Investment decision

Financial decision

Dividend decision

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Objectives of financial Objectives of financial managementmanagement

1) Profit Maximization

2)Wealth Maximization

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1) Profit maximization1) Profit maximization

When profit-earning is the main aim then its maximization should be obvious.

Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise.

Profits fuel business growth. So business should maximize profit to ensure strong growth.

Business risks are unavoidable as well as uncertain.

All other business goals (social goals can be meat only with adequate profits)so it should be maximized. 19

Criticisms of profit Criticisms of profit maximizationmaximization

Profit maximization ignores time value of money.

Profit maximization does not take into account the risk involved in prospective earnings.

It would lead to inequalities and loss of human values which are essential to a society.

Today's market is characterized by imperfect competition in this scenario, profit maximization can not be the obvious objective of the business.

The term profit itself is not precisely defined, it can be short term/long term or gross profit/ net profit before tax/ profit after tax, as such maximizing profits is also vague.

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2) Wealth 2) Wealth maximizationmaximization Wealth maximization means

maximizing share/stock holders wealth.

symbolically

share holder’s = no of shares × wealth owned

Current stock price per share

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Factors in favor of wealth Factors in favor of wealth maximizationmaximizationIt serves the interests of creditors,

employs, shareholders and society.Wealth maximization adds to

productivity and efficiency of the firm.It minimizes the conflict between

share holders and management of the company.

Wealth maximization takes into account time value of money.

the objective helps in increasing value of shares in the market.

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Criticisms of wealth Criticisms of wealth maximizationmaximization

It is prescriptive idea. It is not descriptive of what firms actually do.

Wealth maximization is not necessarily socially desirable.

There is some controversy as to whether the objective is to maximize shareholders wealth or firms wealth(since debenture holders, preferential holders also happen to be a part of the firm).

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Quick Quiz...

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1.What is the goal/objective 1.What is the goal/objective of financial management?of financial management?

A. Profit maximization and wealth maximization

B. Business expansion and asset management

C. Investments and share market analysis

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A. Profit maximization A. Profit maximization and wealth maximizationand wealth maximization

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2. What are the four basic 2. What are the four basic areas of finance?areas of finance?

A. Business finance, share market, domestic finance and investments.

B. Corporate finance, investments, financial institutions and international finance.

C. Public finance, private finance, personnel finance and corporate finance.

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B. Corporate finance, B. Corporate finance, investments, financial investments, financial institutions and institutions and international finance.international finance.

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3. What are the three 3. What are the three types of financial types of financial management decisionsmanagement decisions

A. Capital budgeting, capital structure and working capital management.

B. Profit management, cash management and deciding capital structure.

C. Capital budgeting, deciding capital structure and capital budgeting.

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A. Capital budgeting, capital A. Capital budgeting, capital structure and working structure and working capital management.capital management.

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4. Who is the present CFO 4. Who is the present CFO of INFOSYSof INFOSYS

A. NANDAN NEELEKANI

B. KRISH GOPALA KRISHNAN

C. VIBIN BALAKRISHNAN

D. SUDHA MURTHY

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C. VIBIN BALAKRISHNANC. VIBIN BALAKRISHNAN

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5. Name any five 5. Name any five financial institutions.financial institutions.

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6. Who is the present 6. Who is the present finance minister of INDIAfinance minister of INDIA

A. Manmohan singh

B. Mranab mukarji

C. P. chidhambaram

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A. Manmohan singhA. Manmohan singh

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THANK YOU…..THANK YOU….. Sunil RNSIT, Sunil RNSIT, BangaloreBangalore

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